Market Surge Follows Fed's Rate Cut and FOMC Meeting Shift in Policy Stance

Stock indexes rallied on Wednesday as investors digested a dovish turn from the Federal Reserve. The S&P 500 climbed 0.67% to post a 6-week high, while the Dow Jones surged 1.05% to reach its highest level in 3.5 weeks. The Nasdaq 100 advanced 0.42%, marking a 5-week peak. December futures contracts echoed the gains, with E-mini S&P futures up 0.66% and E-mini Nasdaq futures rising 0.44%.

What Drove the Market Rally

The catalyst for Wednesday’s advance was the Federal Reserve’s decision to cut the fed funds target range by 25 basis points to 3.50%-3.75%, approved in a 9-3 FOMC vote. More importantly, Fed Chair Powell’s commentary suggested the central bank is approaching its neutral rate and may be nearing the end of its cutting cycle. The Fed’s recalibrated economic outlook also supported sentiment: the 2025 GDP forecast was raised to 1.7% from 1.6%, while core PCE inflation projections were trimmed to 3.0% from 3.1%.

The Fed announced it would purchase $40 billion in Treasury bills monthly starting December 12 to rebuild system liquidity, a measure that reassured markets about financial conditions ahead. Additionally, employment cost data released Wednesday showed Q3 growth of just 0.8% quarter-over-quarter, slightly below the 0.9% consensus and suggesting moderating wage pressures—a dovish signal for future monetary policy.

Key Takeaways from FOMC Meeting Minutes and Forward Guidance

The FOMC meeting minutes reflected a pragmatic approach: policymakers acknowledged that “job gains have slowed this year” while noting “downside risks to employment rose in recent months.” Inflation remained a concern, with the committee noting it “has moved up since earlier in the year and remains somewhat elevated.”

Critically, the Fed’s “dot plot” showed the median forecast for the fed funds rate settling at 3.375% by end-of-2026, implying just one additional 25 bp cut next year. Market pricing now shows only a 22% probability of a rate cut at the January 27-28 FOMC meeting, suggesting confidence the central bank will hold steady in the near term.

Powell’s statement that he doesn’t believe a rate hike is “anybody’s base case” helped calm initially skittish markets, though early trading had seen pressure as some feared a divided FOMC would signal extended pause duration.

Mortgage and Credit Market Response

The positive tone filtered through to housing markets. MBA mortgage applications rose 4.8% in the week ended December 5, though purchase activity declined 2.4%. The refinance index jumped 14.3% as borrowers locked in rates. The average 30-year fixed mortgage ticked up just 1 basis point to 6.33%, remaining relatively stable.

Treasury Markets and Global Implications

The 10-year Treasury yield fell 4.1 bp to 4.147% as bonds rallied on dovish Fed signals and softer employment cost data. March 10-year T-note futures recovered from 3-month lows and closed up 4 ticks.

Overseas, results were mixed. The Euro Stoxx 50 slipped 0.18%, China’s Shanghai Composite dropped 0.23%, and Japan’s Nikkei fell 0.10% after hitting 3.5-week highs. European government bonds faced headwinds from hawkish European Central Bank commentary, pushing the 10-year German bund yield to an 8.75-month high of 2.895%, while the UK 10-year gilt rose to 4.554%.

Sector Rotation and Notable Stock Moves

Semiconductor stocks led the advance, with Micron and Marvell jumping over 4% each, while Applied Materials and Qualcomm both gained more than 3%. The strength reflected optimism about economic resilience and potential AI-driven demand.

By contrast, mobile grocery delivery services retreated after Amazon announced expansion of same-day perishable delivery to over 2,300 cities. Maplebear lost 6%, Uber fell 5%, and DoorDash declined 4%.

Standout gainers included Photronics, which soared 45% on blowout Q4 earnings of 60 cents per share versus 45 cents consensus. GE Vernova jumped 15% after announcing a $10 billion buyback expansion and doubled quarterly dividend to 50 cents. EchoStar gained 10% following a Morgan Stanley upgrade to overweight with a $110 price target.

On the downside, AeroVironment dropped 13% after cutting its 2026 EPS guidance to $3.40-$3.55. Netflix fell 4% as Paramount claimed its $30-per-share offer was superior to Netflix’s bid. GameStop retreated 4% on Q3 sales decline of 4.6% year-over-year to $821 million.

Earnings Season in the Home Stretch

Corporate earnings season is wrapping up with 495 of 500 S&P 500 companies having reported. According to Bloomberg Intelligence, 83% beat forecasts, on pace for the best quarter since 2021. Third-quarter earnings rose 14.6%, well ahead of expectations for 7.2% growth.

Markets will watch Thursday’s initial unemployment claims report, expected to increase by 29,000 to 220,000, for further insight into labor market momentum ahead of the next FOMC meeting cycle.